Donald Trump trade threats lack credibility

US bluster has caused most of the world to rally to China’s side

Lawrence Summers

US President Donald Trump: his rhetoric notwithstanding, it is wrong to say nothing has been achieved through negotiation with China © AP

As the possibility of a trade war between the US and China looms, threats and counterthreats are hurled back and forth and markets gyrate, economic logic and truth appear to be an early casualty. There are certain points of fact on which there should be no disagreement.

First, globalisation and trade have caused significant disruption to the US economy but this has had little to do with trade agreements of the last generation. It is now clear that increased imports especially from China have inflicted substantial burdens on manufacturing workers, particularly in the the north central part of the country. Where too much conventional analysis goes wrong is in attributing this to trade agreements and in failing to recognise offsetting job gains from exports.

The reality is that the US economy was largely open by the 1980s and that every major trade agreement has reduced other nations’ trade barriers by far more than it altered any American trade barriers. This is most true of China’s 2001 accession to the WTO, in which the US only committed to continuing to keep its markets open on the most favourable nation terms that had already been ratified each year for more than a decade but won major changes in Chinese economic policy. The real reason for economic disruption was not trade agreements but the emergence of emerging markets as major participants in the global economy. This is not something the US could stop or, given its export interests and broader interests in global co-operation, could plausibly aspire to contain.

Second, much of President Trump’s rhetoric notwithstanding, it is wrong to say nothing has been achieved through negotiation with China. Only a few years ago, China’s current account surplus was the largest relative to GDP among significant countries, it was holding its currency down to maintain demand for its exports, and most software used on its personal computers and videos on sale in its major cities were pirated.

Today China’s global surpluses are far below past US negotiating targets of a few years ago, China has spent about $1tn propping up its currency, and IP protections are far better enforced than a few years ago for major US software and video producers. Of course major issues remain but the view that multilateral pressure without bluster is ineffective is belied by experience.

Third, extraction of IP through joint venture requirements is largely a problem for companies outsourcing production from the US and not for American workers. Corporations headquartered in the US often complain bitterly that if they wish to enter the Chinese market they must enter into joint ventures with Chinese counterparts who demand transfer of intellectual property and then operate on their own.

These complaints are often accurate. Notice, however, that they typically involve cases where the company in question produces for China in China and so have little impact on US employment. In many cases a substantial number of the company’s shareholders are foreign and it pays taxes to many governments. It is more than a little ironic that an administration that condemns outsourcing should make standing up for those who move production to China so central a priority.

Fourth, bilateral trade bluster is not an effective strategy for the US. While most countries feel somewhat threatened by Chinese trade and business practices, it has been the unfortunate accomplishment of US trade policy in recent months to cause most of the world to rally to China’s side because of our disregard for the WTO and the global system.

Not only does having many others on its side make it easier for China to resist the US, it also undercuts the effectiveness of our sanctions. China can still export to other markets and US producers who use Chinese inputs lose competitiveness when only they are forced to pay tariffs. History is clear that moments of high trade truculence like that pursued against Japan in the early 1990s accomplished very little while imposing substantial costs.

Fifth, threats have to be credible to be effective. In recent weeks, every time the US has pushed its strategy markets have had mini-collapses, and every time it has appeared to pull back markets have rallied. How in such a world can it seem credible that the US will actually carry through on its threats? And without credibility why should one expect strong responses from China? I return from a recent meeting with senior Chinese officials with the clear sense that they are more bemused than alarmed by what they see as a boomeranging US approach.

The US can do much better for itself and for the global economy but this is the subject for a subsequent column.

The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary

The Geopolitics of London: Making a Global Financial Center

By Jacob L. Shapiro and George Friedman

If London were a city-state, it would boast the 20th-largest national economy in the world. Its national per capita gross domestic product would be greater than that of the United States. It would be the 15th most populous country in Europe and, most important, it would have voted to remain in the European Union.

But London is not a city-state, and it can never aspire to be one. For just under a millennium, London has been the capital of England; for more than three centuries, it has been the capital of the United Kingdom; for more than a century, it was the capital of the largest empire ever conquered. London embodies the paradox of all great cities. Great cities are the ultimate expressions of their national cultures, often serving as the seat of power for millions, even billions, of people who do not actually live there. But just as often, the interests of the cities diverge from those of the rest of the nation.

Source: Geopolitical Futures (Click to enlarge)

Such is the case for London. The power it wields and the opportunities it offers have attracted people from all over the world. The city has become a strategic necessity for the country in which it resides. The role London plays in that strategy changes according to the necessities of the times, and it’s just as likely as not that its interests actually align with the United Kingdom’s.

Consider Brexit. No part of the United Kingdom will feel the ramifications of the UK’s departure from the EU more deeply than London, which by dint of strategic necessity became a European financial and economic powerhouse. That is why Londoners voted with the Scots and the Northern Irish to “Remain”—because London, not England, will bear the brunt of the short-term disruptions to come.

But London has transformed itself many times before, and there’s no reason to believe it will be daunted this time around. As much as it would like to remain Europe’s primary financial capital, London has been and always will be a national capital.

Bridgehead Revisited

For the first several centuries of Britain’s existence, much of the world used London as a bridgehead for invasion. But after the Industrial Revolution, when the British Empire reached the height of its power, London instead became a bridgehead for England to invade much of the world.

Source: Geopolitical Futures (Click to enlarge)

The city had grown only more powerful since it became England’s capital. The majority of British wealth and power became concentrated in southern England and, to a lesser extent, the Midlands, Britain’s most fertile areas. The Greater London area was by far the richest and most populous simply because it was a trade hub for the country and, by extension, the rest of the world.

Advances in agricultural technology enabled people around the world to live longer. The resultant population boom raised demand for virtually all goods. At first, English farmers who worked in cottage industries could not keep up with demand, so huge factories were created to keep pace. Later, farmers in southeast Britain began to leave their homes for the cities—at first, mainly London—to seek out better paying jobs. By 1801, London had a population of 960,000. By 1911, it had a population of 7 million.

London became even more important in its role as Great Britain’s main port. Great Britain simply did not possess enough raw materials to keep pace with demand. And so it began to import larger and larger amounts of raw materials from its imperial possessions. Even the imperial possessions it could not keep began trading with Great Britain on a massive scale. In 1784, the US exported eight bags of cotton to England. (That is literally what the statistics say, without further clarification.) Within 15 years, the US was exporting 40,000 bales of cotton to England each year, and by 1900, that figure had risen to 7 million. The story was much the same for other commodities like sugar and tobacco.

London was not the only city to reap the benefits, of course. By 1900, Glasgow, Manchester, and Liverpool all had populations of over 1 million people. Northwestern England, which before had been a relative backwater, became Industrial England. New nodes of political and economic power that had not existed before sprang into being, the effects of which became truly apparent only in the decades following World War II. But in the 19th century, none came close to rivaling London’s immense wealth and power.

London was the main seat of political power and had also become a center of commerce. And it was the largest manufacturing town in the country that had been the vanguard of the Industrial Revolution.

Ground Zero of a Revolution

After World War II, London was a shell of its former self.  The UK kept many of the trappings of imperial power, of course. It developed nuclear weapons, maintained a relatively impressive military, and held a permanent position on the UN Security Council. But in large measure, the UK’s fate became directly tied to Europe’s fate, and no region of the UK could coexist as easily as London could as both capital of England and European hub. British power became metropolitan power, and London remade itself once again, as it had so many times in the past, to meet the challenges of the day. With all the ingenuity and cosmopolitanism it had acquired as an imperial capital, London built itself up at a dizzying pace and became Europe’s—and the world’s—pre-eminent financial center.

It regained its place as a global financial center precisely because London had been ground zero of the Industrial Revolution. Much of the infrastructure necessary for finance was already present in London, and compared to all other potential challengers, the regulatory framework was more predictable and friendly to investment in London than anywhere else in the world. In relatively short order, it put its wealth of experience in global finance to work and so was able to recover from World War II more quickly than other European cities.

It wasn’t easy to get there—the UK was heavily indebted until the 1960s—but when it did, it arrived with authority. It became a global banking hub, boasting the largest foreign-exchange market in the world, and it was already one of the world’s oldest insurance markets. For the rest of the UK, the sterling was used daily, but London profited from specializing in the trading of offshore currencies, especially dollars held outside of America.

Notably, London soared higher than ever because of the Maastricht Treaty, which created the European Union and paved the way for the adoption of the euro. The United Kingdom never adopted the euro itself, but that didn’t stop London from financially dominating the European Union. According to the House of Commons Library, financial and insurance services accounted for 7.2% (124.2 billion pounds) of the United Kingdom’s total gross value added in 2016—a fairly small proportion in the UK’s overall economy. London, however, accounted for 51% of that total. In fact, when you compare industrial variation in total gross value added of UK combined authorities, London presents a much different picture than the rest of England. Roughly 14% of London’s GVA came from the finance and insurance industry, while just 2.1% came from manufacturing. The opposite is true for every other UK combined authority.

Source: Geopolitical Futures (Click to enlarge)

Some 2.2 million jobs in the UK are related to financial and related professional services.

About 47% of those jobs are located in London and in the southeast, according to TheCityUK. No other region of the UK has a percentage higher than 10%; Wales and Northern Ireland boast only 4%. Moreover, the jobs in London are generally geared toward international finance, whereas in other regions they are focused more on British finance. The UK’s global value added per head has obviously benefited from its position relative to the EU—but here again, London has experienced those gains to a far greater extent than the rest of the country.

Source: Geopolitical Futures (Click to enlarge)

London’s time as the undisputed king of European finance ended on June 23, 2016, when the United Kingdom voted to leave the European Union. There were many precursors to this change, but one was more important than all the others, and it is perhaps the most overlooked: the collapse of the Soviet Union and the reunification of East and West Germany. Just as German unification in 1871 defined European history for decades to come, Germany’s second unification in 1990 has also defined Europe’s future—a future that Britain could no longer control. Remaining in the EU would have meant subordinating British interests to German interests, and there was never going to be much of a future in that.

The more daunting challenge emanating from across the channel is the reactivation of great power politics. The most disastrous periods in London’s history have come when Great Britain did not have the power to repel foreign invaders. Ironically, the UK’s decision to leave the EU underscores a far bigger threat to London than international banks leaving the city or tough German negotiating tactics: the attendant conflicts and rivalries that have delegitimized the European Union.

Against these national forces, London is relatively powerless. Its fate rests in the hands of the nation it sustains, a nation that can in turn protect London only by maintaining old allies such as the United States and developing new ones in Europe and beyond. The fate of the UK, meanwhile, depends on London’s ability to find new ways to create and share wealth with future generations of British citizens.

For more than a thousand years, London has been the UK, or some iteration of it.

Though the two see the world differently right now, they can afford to. The future will not be as kind, and when tha future comes, the interests of nation and city will be joined once more.

Consumer Credit May Weigh on Economy

Evidence is mounting that consumer lenders are slowing their credit card, auto and other loans

By Aaron Back

Consumers drive the U.S. economy and if they moderate their spending, overall economic growth could be lower than expected.
Consumers drive the U.S. economy and if they moderate their spending, overall economic growth could be lower than expected. Photo: Erica Yoon/Associated Press 

Weak consumer lending risks becoming a headwind for an otherwise healthy economy.

Evidence is mounting that consumer lenders are slowing their credit card, auto and other loans.

Monthly data from the Federal Reserve shows that total consumer loans outstanding rose at a seasonally adjusted annualized pace of just 3.3% in February, down from 4.9% in January and 6.0% in December.

For all of 2017, consumer loan growth already slowed, dropping to 5.4% from 6.8% the prior year, according to the Fed data.

Change in total revolving consumer credit, seasonally adjusted annual rate:

Source: Federal Reserve

Revolving consumer credit lines, primarily credit cards, have slowed even more sharply. Total outstanding revolving credit was up a seasonally adjusted, annualized 0.2% in February. That is the lowest monthly reading since revolving credit fell in November 2013.

There are two explanations. First, lenders have grown more cautious over the past year in response to rising delinquencies and defaults on their loans. The Fed’s survey of senior loan officers shows more bankers tightening terms on consumer loans than not in four of the last five quarters.

Shares of consumer lenders have underperformed lately, reflecting concerns over slower loan growth and credit issues. A group of five major card issuers fell an average 9% in the first quarter while two major auto lenders fell 10%, analysts at Keefe, Bruyette and Woods pointed out in a recent note. That compares with a 1% decline in the S&P 500 over the same period.

Second, consumers may now be paying down loans that they accumulated over the past few years of strong credit growth. This effectively means that consumers are saving more.

It also means that modestly rising wages and lower taxes won’t spur consumer spending as strongly as investors appeared to believe last year. Consumers drive the U.S. economy and if they moderate their spending, overall economic growth could be lower than expected this year.

How Inequality Fueled the Euro Crisis

Benedicta Marzinotto

BRUSSELS – Since the Great Recession of 2007-2009, most economists have begun to regard finance as a key driver of the business cycle. But the precise dynamics are not yet fully understood.

For example, the University of Chicago’s Amir Sufi and Princeton’s Atif Mian argue that credit expansion leads to nasty recessions, which emerge as soon as households, for whatever reason, lose access to the financing they need to roll over their debts. But this argument misses a key factor, exemplified by the eurozone crisis.

The creation of the euro was accompanied by large-scale financial liberalization, including the elimination of capital controls and the adaptation of the legal framework to allow any European bank to open branches abroad. This process led to growing competition in the banking sector and a progressive increase in the ratio of private banks to public ones.

The result was an across-the-board decline in long-term interest rates, and an increase in credit as a share of GDP. European households almost everywhere became more indebted, but the impact of this credit expansion on private consumption was fundamentally different in the EU’s core countries, where current-account surpluses grew, and in the periphery, where countries accumulated deficits.

Why did the same credit-supply shock produce such varied responses? As a recent study shows, the eurozone’s financial-liberalization process amounted to a more profound shift for the periphery than for the core, with the former having had less open capital accounts, more public banks relative to private ones, higher long-term interest rates, and lower credit-to-GDP ratios.

The same study argues that in the more financially repressed peripheral countries, the main expectation associated with the liberalization process was that those who had previously lacked access to credit – say, because of low incomes or low savings – could now borrow, in order to finance more consumption. In other words, it was low-income households – which represent a large share of the population in the relatively more unequal countries of the periphery – that played the largest role in changing their economies’ external positions.

In the eurozone core, by contrast, the initial upshot of the euro’s introduction was mainly more and better saving opportunities, characterized by improved risk-return trade-offs. This primarily benefited wealthy households, which could, for example, borrow to make long-term investments that would finance future, rather than current, consumption.

Because higher-income households comprise a larger share of the total in these countries (which also tend to have lower levels of inequality), aggregate consumption remained subdued. With inequality starting to rise in the 1990s – particularly in Germany – these households had all the more incentive to increase their savings.

The contrasting trends in the periphery and the core were intensified after the global financial crisis erupted, and the eurozone entered recession. In the periphery, low-skill groups were the first to be ejected from the labor market. With troubled commercial banks more risk-averse, these struggling consumers could no longer borrow to roll over their debt and finance current consumption, which came to a halt, deepening the recession.

In the core countries, by contrast, the key borrowers were wealthy, and thus suffered the least. If they did face negative income shocks, they could use their savings as a cushion. So the severity of the bust was a function not simply of the level of household debt, but rather of the distribution of debt across income levels.

To some extent, this is good news. With the periphery having already endured the initial financial-liberalization shock, future credit-supply events are less likely to affect them disproportionately. And the shifting of macroprudential regulation from the national level to the European Union may reinforce this outcome by further helping to harmonize bank-lending behavior.

But there is a snag: EU-level financial regulation is limited to the large systemic banks. As a result, it is unlikely to affect the operations of the small local banks lending small amounts to impatient low-income consumers.

The best way to strengthen eurozone financial resilience is to address borrowing incentives. And the best way to do that is to improve the position of low-income borrowers by investing European resources in education and job quality. Even in the core, more equality of opportunity might improve morale, thereby reducing precautionary saving. Human-capital upgrading and more equality of opportunity should play a prominent role in negotiations over the EU’s next Multiannual Financial Framework, with the European Investment Bank possibly also providing support.

As it stands, the common denominator of existing eurozone-reform proposals is the completion of a banking union, which many believe is needed to reduce financial fragmentation and break the vicious circle between banks and sovereign debt. This is the area where progress is most likely in the run-up to June’s European Council meeting. But, while a banking union would be a positive step, it will be incomplete without efforts to reduce inequality.

Benedicta Marzinotto is Lecturer in Economic Policy at the University of Udine and Visiting Professor of EU Macroeconomic Policies and Governance at the College of Europe.